Development Directions

The imminent forced sale of two major food co-ops -- Consumers Cooperative of Berkeley (C.C. Berkeley) and the Distributing Alliance of the Northcountry Cooperatives (DANCe) -- prompts me to look again at some questions about the larger picture: What kind of food cooperative system do we have? What kind of system will best promote co-op survival and growth.*

* Looking back, some readers will recall ideas for a different approach to food co-op development in the exchange on "Why Co-ops Die" published in these pages last year (Cooperative Grocer #9 and #10). A few years earlier, there was the Report of the National Planning Task Force for Food Cooperatives, urging similar conclusions. Still earlier, with distressingly familiar analysis and recommendations for its co-op audience, was the 1948 Gabler Report. For summaries of the latter two documents, see Moving Food #21 (May-June 1983). For copies of any of these, or references to statements by others used in writing this article, contact me c/o Cooperative Grocer. The standard source on the Bay Area co-ops is Robert Neptune's 1976 book, California's Uncommon Markets, covering the first forty years, and his 1982 update of the same name.

Needless to say, food co-ops have failed before. I doubt whether their survival rate is better than that for small businesses in general -- as many as half of which fail in their first five years. Yet why shouldn't co~ops' survival rate be better, if they indeed are member based, driven by member needs?

What makes the recent cases in California and Minnesota especially noteworthy is that they mark the ends of the largest retail food co-op operation in the U.S. and of the co-op distributor based in the next largest retail food co-op market in the U.S. What does the inability of these cooperatives to survive offer in the way of lessons? I can't pretend to have space or knowledge adequate to answer this completely, but certain conclusions, aided by the comments of other cooperators, will be presented.

In particular, the case of DANCe, with which I am intimately familiar, highlights critical weaknesses of the present food co-op system and its development pattern. The history of the Bay Area consumer food co-ops, dating from the late 1930s, is much longer and more complex, and has been widely commented upon; in recent years I have followed the passionate debates within the Berkeley Co-op and its wholesale, Associated Cooperatives, Inc. (ACI), through the words of various California co-op leaders and observers. DANCe, on the other hand, while it was born in 1975 in dramatic and very public circumstances, has more recently been governed and managed in ways that discouraged informed member debate.

Planned Growth, Strong Boards, Non-uniqueness

Given these broad themes, perhaps stating certain assumptions will be helpful for some readers.

First, as businesses as well as a social movement, cooperatives should be committed to growth -- planned growth. Planning, of course, improves the odds of sustaining a new venture (whatever its form) and implies a systematic approach to growth. Glib dismissals of "growth for growth's sake" overlook that growth of co-ops and of a cooperative system means better services for the members, more jobs provided by co-ops, a better chance of co-op business survival, and more of the overall economy being democratically owned. Unless we are to abandon visions of a possible future in which social ownership including cooperatives plays a leading role in the economy -- or, put most simply, unless we disavow an intent to share the benefits of cooperative enterprise with as many others as possible -- we must aim to develop a cooperative system capable of growth and replication of success. The type of growth -- the main theme of this article -- is another question. For example, big can be bad -- or better. Small can be beautiful -- or bathetic.

In order to carry out such planned growth, stores of all sizes need to govern a strong and effective secondary level or regional organization. My second assumption is that the boards of directors, or comparable authoritative governing and planning bodies working with management, are a crucial component in implementing, sustaining and expanding cooperative businesses and democratic economics. I believe this to be true despite recognizing limitations to consumer democracy as elaborated by historic leaders and as practiced by many co-ops I have encountered. I also believe it to be true in well developed worker and consumer cooperative systems in other countries. Neither direct democracy's requisite mass participation nor talented and loyal management can substitute for delegated authority and board leadership.

A third assumption is that history is a good guide, though not a determinant, for today's cooperators. A friend and I used to joke about myopic cultural radicals for whom modern history began with the 1960s and for whom pre-history was "B.E."-Before Eisenhower. "Forget the past," some seemed to say, "we can do whatever we want."

That past may be decades of experience of the "old wave" co-ops such as C.C.Berkeley, which in fact were sustained by visions and principles very similar to those of the present food co-op generation; to this day, a prominent store in my home town of Minneapolis, in a published history of their co-op, smugly disassociates themselves from such older, larger cooperatives. Or the past may be very recent years of co-op organizational history -- this kind of forgetfulness often is another form of denial, denial of real conflicts of interest and direction within these cooperatives.

Tragedy and Farce

Marx suggested that history repeats itself, the first time as tragedy, the second time as farce. That's something like what happened with co-ops and communists in my region of the country. The nineteenth century struggles between libertarian and authoritarian socialists were repeated in the cooperative network in the Upper Midwest during the 1920s and 1930s, when one faction wanted the regional wholesaler tied to a political party loyal to Moscow; and repeated again in the 1970s by a new generation of co-ops. The latter struggle provides the background to DANCe.

A proliferating but structurally very weak network of independent food co-op stores and buying clubs had sprung up around the People's Warehouse in Minneapolis -- in the same manner, but with greater numbers, as had other such networks in regions across the U.S. and in Canada. In 1975, the Minneapolis warehouse and several stores were taken over, through force of argument as well as the "argument" of force, by a well organized sect of would-be revolutionaries whose professed mentor was.. Stalin! Their ideologically driven campaign opposed the de facto control of a grass roots cooperative movement by a group practicing another ideology, less overt but equally dogmatic in some ways, characterized by an exaggerated egalitarianism coexisting with food policies and cultural attitudes that were narrow (to put it kindly), and by suspicion of central planning, business professionalism, and representative democracy. The latter camp of cooperators opposed the leftist sectarians, then formed a new warehouse, DANCe, and later closed the old warehouse after winning a legal battle over its ownership, which had not been well defined.

But in reaction to the abuse of power in their former distributor, the area co-ops crippled the business and leadership powers of the new one. They accomplished this, and laid the foundation for the collapse of DANCe twelve years later, in two key ways. First, rather than making the warehouse the leader in expanding and strengthening the growing co-op market and network, through means such as a commitment to board development and business commitments between the wholesale and its member retails, they instead split off co-op education, technical assistance, and development activities into a separate organization. This parallel body, the All Co-op Assembly, lacking an adequate capital base and definition of purpose, declined after several years, but only after a flourish of efforts which helped launch or shore up many small food stores -- none of which looked to their primary distributor for business services essential to their survival, and each of which had its own unstable mix of methods for pricing, accounting, merchandising, personnel, membership, management, board training, etc. Only a few weeks ago, yet another one of these DANCe member stores, alone in a market dotted with other food co-ops, died.

Fragmentation -- or Integration

Of course, here and elsewhere, the surviving stores and distributors have gradually strengthened their operations and services. But the pattern of independent, fragmented store development remains, for this region as well as nearly all others, the only form of such planning -- if it can be called that -- assuring not only a high failure rate for the stores, but, in Minnesota, a failed co-op warehouse. Riding the ephemeral rush of leading an expanding natural foods market, we ignored the grounds for survival and success among independent food retailers over the previous forty years. Through standard industry services provided by wholesalers -- in pricing, product development, merchandising, store layout, management training, accounting, and more -- as well as through additional programs with other independents, these stores have improved their competitive ability to survive while maintaining local ownership. Co-ops can and should do the same thing, standardizing systems and consolidating their efforts.

The Minnesota co-ops also crippled the distributor they themselves owned by encouraging the formation of other worker collectives or worker cooperative distributors handling product lines which were then held to be off limits for DANCe. This move, described as "decentralist" by its proponents, flew in the face of distributor needs, and hurt both the potential volume and potential margins of the consumer owned wholesale. Meanwhile, like the stores themselves, the worker owned distributors were not bound to any defined form of accountability; cooperation among cooperatives took place, but only informally, when complete independence was not threatened and when other business and personal ties did not interfere.

Interdependence, or integration of a consumer-retail-wholesale system, requires sharing power, defining and delegating authority, and holding it accountable through an elected governing body. The metropolitan stores dominated DANCe sales, but never its governance and direction; these stores seldom nominated and elected their best people, the store managers and board leaders, to the wholesale board. Internally, the workers were not held accountable, and weak management characterized the warehouse as well as many of the member stores.

Hybrids and Non-member Sales

The lack of system integration was mirrored in the organizational structure of many of the Minnesota stores as well, a hybrid worker co-op incorporation based on the then common food co-op practice of requiring members to contribute labor to the co-op. Member labor was a cornerstone of the above mentioned ideology; it was the new wave's answer to older co-ops' visible experience of declining member participation; it also confused the issue of who the cooperatives were for. The labor requirement (as I have argued in these pages before), became exclusionary, leading to an increasing divorce between a store's customer base and its member base. Even today, more than ten years later, some DANCe member stores haven't changed from this original structure or are only now doing so; their own development as cooperative stores has not been adequately member based any more than was the development of their own now nearly bankrupt co-op distributor. And in its own way, the Berkeley Co-op had the same problem. In 1986, looking backat years of decline, a Berkeley board member argued that "Non-member patronage is a drug for co-ops, and our co-op has become an addict, weak and dependent."

In the Twin Cities and surrounding region, the sheer number of co-op stores argues for integrated or at least standardized systems that never have been achieved; at one point, upwards of 80 stores were members of DANCe, with two-thirds of total warehouse sales coming from two dozen co-ops in a two million population metropolitan area. This fragmentation highlights, to repeat, the weak retail co-op development approach common to almost all the regional co-op distributors.

In California, the sheer size of retail co-op volume argued for integrated systems. C.C.Berkeley peaked in the late 1970s with thirteen grocery stores and annual sales of over $80,000,000. Their wholesale, Associated Cooperatives, a small player in a field of distributor giants, reached $60,000,000 in sales. For most of fifty years, the Berkeley Co-op was by far the largest member of the regional distributor, providing 80 percent of ACI sales in some years. Yet these two co-ops, despite their close proximity and parallel development, despite many proposals and partial efforts, never achieved full integration either. In 1962, the general managers of Associated and the retail co-ops in Berkeley and Palo Alto (the other leading Bay Area member of ACI) proposed a merger of the three; and for several years thereafter a merger proposal from ACI was before the Berkeley Co-op board, but the latter rejected it. At the same time, and paralleling the pattern around DANCe and its largest members, the C.C.Berkeley leadership rarely felt they retained power on the ACI board commensurate with their co-op's lion's share of the distributor's sales.

For a number of years, product line development and physical distribution, office facilities, plus some other programs and management functions, were very closely coordinated between C.C.Berkeley and ACI. But an unwillingness to integrate fully -- to standardize and consolidate in such areas as member development and shares, accounting, training, and new co-op development -- certainly contributed to major problems such as those around management succession, or the later fiscal and political mismanagement by ACI of its relations with C.C.Berkeley. A divided food co-op system also handicapped the participants' ability to plan and manage growth.

Expansion at Berkeley: "Unprepared"

By the early 1960s, after years of profitable and growing operations, marked by leadership in consumer protection and member participation and by growth in CO-OP Label sales, the Berkeley Co-op was a dominant force in its market, with four stores and as much as a third of total grocery sales in the city of Berkeley. But further expansion was needed, especially at the wholesale level, to maintain competitive prices and services.

Lack of system integration -- or at least a system-wide development plan -- certainly shaped the prospects of the major expansion that took place in the Berkeley Co-op during the 1960s, a process that many now identify as the historical root of its later persistent losses. Note the strong statement of this view by C.C.Berkeley board member Margo Robison, in describing to members what led the board to sell the co-op's stores (see the accompanying sidebar): "If I were to attempt one statement describing those events it would be this: We were unprepared as an organization for the series of expansions we undertook between 1962 and 1975."

The problem lay, again, in the method of growth -- not so much the acquisition of additional stores within one co-op, in most cases a better approach than forming independent stores, but expansion into stores that were losers to begin with, expansion into new markets and new employees that was not member based or sustained with adequate membership development efforts. Eventually, all the stores suffered from inadequate resources in this crucial membership area. Member shares, the chief source of capital even up to the mid-1960s, when the earnings decline began, rapidly diminished in importance, and outside financing became increasingly necessary. The co-op's growth into new stores outside its original community of Berkeley was not successful in most instances; eventually, as competitive pressures increased, all the stores outside Berkeley failed, including a final disastrous attempt in 1985 to open a new upscale store, Savories, in Marin.

The ten-year expansion and subsequent contraction of the Berkeley Co-op introduced two very serious, eventually fatal trends: decreasing member enrollment, patronage and capital; and increasing labor costs, as a union contract and store closings required retaining the highest seniority and hence highest paid members of a steadily shrinking workforce. Serious operating losses began in 1970, worsened in the 1980s. Closing some of the weak stores was avoided by the C.C.Berkeley board for too long. Later, selling off co-op property became a means of softening the blows of the continuing decrease in sales and increase in losses.

At Associated Cooperatives, there was no co-op development department at all until 1979 -- after twenty years of many different store start-ups and formats, expansion and closings -- in time to provide valuable assistance to smaller, new food co-ops, but much too late to affect the decline of C.C.Berkeley. ACI's other leading member, Palo Alto Co-ops, also was closing some of its stores. Retail cutbacks in turn precipitated a decline at the wholesale. C.C. Berkeley and ACI came to an acrimonious parting of the ways in 1985-86, and Berkeley found another main supplier. The warehouse was closed in early 1987 with CO-OP Label items brokered by ACI through Sierra Naturals, a San Francisco distributor.

Another Hybrid? The End for Our Subjects

The Berkeley Co-op's last gasp -- noteworthy in relating their story to themes in the Minnesota chapter -- was a proposed new structure, a hybrid worker-consumer cooperative, in which both these stakeholders would have major shares of the equity investments as well as seats on the board of directors. This was viewed as the only viable means of bringing labor costs under control. The proposal was approved by the Berkeley board in 1987, in the face of an inability to achieve a more conventional solution by securing additional financing from their major creditors, the National Co-op Bank and Certified Grocers, the giant retailer owned co-op that became Berkeley's primary distributor after the split with ACI. The hybrid worker-consumer structure was approved by C.C.Berkeley members late last year. It then went to the union for negotiation, vote, and further negotiations. Despite initial approval by union members, and a commitment to a pay cut as well as a several thousand dollar investment by each worker, the complex and sensitive negotiations between the co-op and the union dragged on for too long. A precarious financial position continued to deteriorate, and financing for the new package could not be found. Finally, this past May, with no further credit available from their main supplier and experiencing operational losses of thousands of dollars per day, the board forestalled bankruptcy by putting the three remaining co-op stores up for sale. Berkeley Co-op members will soon vote, as required by law, on the proposed sale of all three stores to Living Foods, a Bay Area retailer with a natural foods emphasis. The sale is likely to be approved.

Berkeley Co-op members, expecting a negotiated solution, were surprised and saddened. Perhaps only the first of these truly describes the reactions of most co-op members in Minnesota around the same time, when the board of DANCe announced that the financial and management resources had so deteriorated that the sale of the warehouse to its sister co-op in Iowa was being negotiated. DANCe members also are likely to approve the sale of their co-op.

Berkeley Co-op:

Where We've Been, Where We're Going

By Margo Robison

This board member's statement is excerpted from the June 29, 1988 C.C.Berkeley "Co-op News."

The fact that CCB can no longer serve its members as a food retailer is neither surprising, mysterious, nor the result of conspiracy. We have simply come to the end of a 20-year period of not being a profitable company and have no more assets with which to pay for our operating losses. The miracle of having managed to stay afloat over this period is an indication of the size of the asset base we have squandered in doing so.

The course of events which led us here will no doubt be extensively analyzed over the coming years, but if I were to attempt one statement describing those events it would be this: We were unprepared as an organization for the series of expansions we undertook between 1962 and 1975 and we never caught up. By unprepared I mean we did not have operating strategies (ordering, merchandising, accounting, etc.), an effective personnel system, a consistent marketing approach, or an adequate governance structure to deal with a much enlarged, geographically widespread and culturally diverse operation. While attempts were made over the years to deal with these problems they were largely bandaid approaches.

From the beginning, most of the expansion stores were at best break even operations. As they turned one by one into money losers, Boards could never quite bring themselves to the decision to close in a timely fashion. It seems each store had sufficient member interest to mount a convincing protest to its closing, but not enough member buying power to make the store a profitable operation....

When we came to end of the store closing road we faced this situation:

1) We had neglected capital improvements in our remaining stores over a ten-year period. These stores were not only shabby and poorly equipped, they were too small by current standards to carry the mix of items required for profitability in today's market.

2) Our much contracted and very senior workforce put our cost of labor at least 33 percent above the competition. This statement does not imply that senior workers in a company should not have a reasonable wage and benefit package and a normal work schedule. It is simply an acknowledgement that a chain that does not grow, or worse, gets smaller, cannot remain competitive in today's supermarket industry.

3) Our operating system still did not function effectively and had not been updated to industry standard (retail accounting, scanning for inventory control, etc.).

4) We had failed to maintain our leadership in the industry. Ideas that we had initiated -- unit pricing, nutritional emphasis -- were now standard and we had not continued to innovate; merchandising areas in which we had broken ground (superior produce; ethnic, gourmet, and natural foods; quality house label) had been taken over and were being done better by others while we were in decline.

5) Our membership base had deteriorated even in Berkeley, so our sales were declining in real dollars. It is possible we have not really lost members, but we have failed to bring in enough new members to maintain required volume.

In the last five years there have been two efforts at turnaround -- one, the ill-fated Marin Ranch market (the idea behind this was to attempt to recapture the initiative by emphasizing pesticide-free produce, an idea which Raley's seems to be marketing successfully five years later); and the second, the worker-consumer hybrid, which was probably a workable idea, but we ran out of money before it could be implemented....

The planned scenario was not what happened. Instead:

1) Negotiations dragged on until April 1988 with the Union reluctant to commit to the new structure. The end of negotiations was marred by a misunderstanding which had the Union promising the employees control of the new operating company, while the CCB negotiating team felt it had agreed to the worker-consumer parity pattern of control previously approved by a vote of Co-op members. The Union felt it could not go back to its members with a revised proposal and the Board ultimately felt it had no option but to accept the agreement as stated to the employees.

2) Despite the fact that the negotiations had taken longer than we planned, we might still have had the time to implement if our economic equation had held together. It did not. Patronage had declined below the conservative projection of 1986 levels at a time when conditions in the stores were better than they had been in the previous two years. We moved from having periods of insufficient cash flow to a condition of having no cash...

3) The business plan had been created and given to the Union, but as a result of our unstable financial condition, interim financing was not forthcoming.

It was at this point that Certified Grocers informed us that we were well above the amount of credit which it was their policy to extend and they would therefore place us on COD for all future grocery orders. Since our purchases were limited to cash on hand, the lack of product on our shelves resulted in even lower sales levels. Certified Grocers also announced their intention to call in the $1 million dollar loan they had provided on condition that we have a reorganization plan in place by December 1987.

Since interim financing was not immediately available to us, Local 870 decided that we had breached our agreement and stopped the wage deductions begun the week previous to initiate the workerconsumer co-op.

At its meeting in early May, recognizing that continued losses would quickly put us in the position where our liabilities outstripped our assets, the Board reluctantly made the decision to authorize management to pursue the sale or lease of our stores in whatever way would satisfy our creditors and be most advantageous to CCB's members...

While the search for offers and the review of alternatives continued, actions to keep the stores open were taken...Board and management met with bankruptcy counsel to seek advice on a course of action. Counsel advised a friendly arrangement with creditors rather than the much more expensive Chapter 11 solution. Management called a meeting of our creditors who then formed a creditors committee. This committee functions on behalf of all the creditors to monitor our situation. The committee will cooperate as long as CCB is seen as behaving in a way which will ensure that all debts are ultimately paid.

That was the situation when the Board met on June 9 to review the sale or lease offers which management had culled from 12 to 4. The primary criteria was the payoff of all existing liabilities.

Only two available offers could meet this primary criteria -- one from Berkeley Markets, Inc. (Living Foods) and one from another company wanting all three sites. Of the two, the BMI offer was by far the superior one, not only in the amount of cash offered, but in its benefits to all the stakeholders including our employees. These benefits are:

Providing the income to stay alive as a functioning co-op entity which can provide other member services

Providing the possibility of union jobs for our entire workforce

Keeping our small vendors (many of them co-ops and collectives) out of bankruptcy themselves.

The Board accepted the BMI offer contingent upon successful negotiation of a detailed agreement between BMI and CCB...

[This is] the choice that will allow us to continue as a co-op. Statements that we will only be a landlord and a newspaper publisher are lacking in vision. Our Co-op currently does many things beside sell food. We went into the food business because the members at that time felt it was an area in which a cooperative organization could provide better quality goods at lower prices than were available in the existing marketplace. Economic factors have changed and that's not the case anymore. Where is the need now? Other retail trade areas? Services? Manufacturing? What's the last thing you needed to purchase which made you wish that you get it cheaper, better, or more honestly merchandised? The possibilities are limited only by our imaginations.

Our strength is in our membership and our dedication to a cooperative structure. As a co-op we are part of an international movement which is a significant economic force in many nations because it's a better idea. Surely we can find a viable niche in this economy in which to build an economically successful member-responsive company.